Robbie Mochrie: Scots currency debate starts at the wrong place

I DIDN’T see it coming. I expected last month’s SNP conference to endorse entirely the rather dull motion for implementation of its Sustainable Growth Commission proposals. And, being fair, the conference did more or less exactly that, supporting (narrowly) a small change. This increases the flexibility of policy implementation, and will ultimately benefit the party’s leadership.

I was perplexed that so much energy was spent on the currency question, when a stable currency is essentially an outcome of other decisions, and national institutions, including government, being considered trustworthy by the financial markets.

It would have been much more interesting to have a debate on how to design the economic institutions which would enable a stable currency. The problem with the conference debate – and indeed debate throughout the year – is that it has been easy to characterise it as left against right, or as demand management from the 1970s versus monetary rigour from the 1980s. This is the sort of debate in which small differences in policy implementation get completely out of proportion. It involves perfectly respectable economic arguments, but not the most fundamental ones.

What should the Scottish tax system do? No-one likes paying taxes, but they’re the price of a civilised society, so let’s set some ground rules. Firstly, it will have to raise enough money to allow government to meet its spending commitments. This is a very simple point, but it’s one which I’ve been worrying about ever since income tax rates started to diverge between Scotland and England. Just how easy is it to switch domicile between Scotland and England for tax purposes?

This isn’t the threat that comes up at almost every election, that if the higher tax party wins, some celebrity will leave the country. It’s about people who live in one country, but work in another one, and who will have the choice to decide where they pay tax. It doesn’t require the loss of many high income tax payers for the cost of this sort of legitimate tax avoidance to be about £1 billion – enough to be an unpleasant shock for a Scottish Government, and cause it to miss revenue targets.

Secondly, the tax system should be seen to be equitable and efficient. In the UK, income tax and national insurance contributions together account for around 75% of tax revenues, so they are the backbone of the tax system. Rather than increasing reliance on income tax, Scotland might look at taxing wealth. Of course, if it’s possible to avoid paying income tax by changing domicile, then many wealth taxes would be even easier to avoid.

There is of course, one form of wealth which, by definition, cannot be moved out of Scotland: land. Economists have long been aware that since supply of land is fixed, its value will be set by demand conditions, which in turn will depend upon the its use.

There is already a campaign for a land value tax (LVT) in Scotland. LVT is different from property taxes because it is assessed on the rents which could be obtained from the land itself, and not from any improvements. For economists, such a tax is especially efficient: the fixed supply of land means that the tax does not affect the level of economic activity, but simply changes the distribution of income in society. Indeed, with the burden of such a tax falling entirely on the landowner, rather than the land user – it has long been the favoured tax of progressives.

This is just one way in which an independent Scotland might secure its tax base, so that it would have a chance of being building the trust of financial markets. A LVT would be difficult to implement because it would need compulsory land registration. So, now is the time to prepare for it.

Robbie Mochrie is an associate professor of economics at Heriot-Watt University

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